Buy Gilead Sciences for Long-Term Gains

Gilead Sciences (GILD) announced first quarter ended March 31, 2016 total revenue of $7.8 billion, up 3 percent year-over-year from $7.6 billion during the same period last year.

Gilead declared first quarter of 2016 non-GAAP net income of $4.3 billion or $3.03 per diluted share, down 7 percent year-over-year from $4.6 billion or $2.94 per diluted share in first quarter of 2015.

The global pharmaceutical company reported satisfactory year-over-year top line growth primarily driven by significant customer traction for the company’s HIV and hepatitis C medicines leading to increased drug sales for the quarter.

Impressive growth

Gilead’s year-over-year top line growth benefited from improved medicine sales for the quarter.

However, the company’s bottom line growth in terms of adjusted diluted EPS declined both sequentially and year-over-year due to notable increase in non-GAAP general and administrative, (SG&A), selling, and research and development expenditures.

The weaker first quarter of 2016 adjusted product gross margin as against first quarter of 2015 signifies nearly $200 million expense linked to the Merck’s trial jury verdict. The greater first quarter of 2016 R&D expenditures over the same period last year is related to the ongoing evolution of relevant clinical studies. Further, a sequential decline in adjusted SG&A expenditures for first quarter of 2016 over fourth quarter of 2015 is mainly linked to weaker fee of Branded Prescription Drug (BPD) and key timings of operational spending.

Gilead seems focused on driving sustainable innovation through focused spending on drug research and development that has resulted in a slight reduction in the company’s gross margins for the quarter both on sequential and year-over-year basis.

Importantly, Gilead recently declared first quarter of 2016 quarterly dividend of $0.43 per share and announced second quarter of 2016 quarterly dividend of $0.47 per share, up 10 percent from the latest dividend offered of $0.43 per share. The second quarter of 2016 quarterly dividend to be paid on June 29, 2016 to all the key stakeholders as of the business closure on June 16, 2016.

Further, Gilead bought back $5 billion worth of common stock during the first quarter of 2016 and currently has $12 billion of January 2016 share buyback authorization still remaining as of March 31, 2016.

Impressive moves

The key pharmaceutical major seems keenly focused on returning a majority of the invested capital to its shareholders in the form of dividends and strategic share repurchases which is in line with its continued commitment to deliver attractive shareholder returns.

Going forward, Gilead has provided complete fiscal year 2016 net product sales guidance in the range of $30 billion to $31 billion. The adjusted product gross margin for 2016 is estimated to be in 88% to 90% range. Diluted adjusted EPS is expected to be in the range of $1.10 to $1.16. Also, R&D and SG&A expenditures are projected to be in the ranges of $3.2 billion to $3.5 billion and $3.3 billion to $3.6 billion respectively.

Total product sales for first quarter of 2016 was recorded at $7.68 billion that grew 4 percent year-over-year from $7.41 billion during the same period last year. However, first quarter of 2016 net product sales declined 9 percent sequentially from $8.41 billion in fourth quarter of 2015. Total HIV & other product sales in the US grew year-over-year and driven by adoption of fresh single tablet regimens (STRs) that includes Genvoya, introduced in November 2015 coupled with Truvada for PrEP.

The sequential sales reduction from fourth quarter of 2015 is due to sub-wholesaler inventory. For Europe, the year-over-year sales decline from first quarter of 2015 is due to unfavorable foreign currency translations. However, Genvoya and latest STRs expanded volume, both sequentially and year-over-year. The consolidated HCV product sales declined sequentially from fourth quarter of 2015 due to the shift in payer mix and greater U.S. rebates. The year-over-year reduction from first quarter of 2015 is driven by weaker Harvoni patient arrivals in the U.S.

Moving ahead, Gilead targets on strategically acquiring Nimbus Apollo, Inc., a fully-owned division of Nimbus Therapeutics, along with the company’s Acetyl-CoA Carboxylase (ACC) inhibitor suite and would receive $400 million of straight payment, with further expectation to receive an extra $800 million during the growth-linked milestones with time.

Gilead’s robust performance in both the HIV and HCV markets suggests sustainable long-term company growth. Importantly, the stock is hugely undervalued and thus, a significantly attractive investment opportunity for long-term investors.

The notable organic and inorganic growth efforts being undertaken by the company must attract both the near-term and long-term investors while having an attractively lower valuation compared to several other stocks in this category.

Conclusion

Overall, the investors are advised to “Hold” their position in Gilead Sciences Inc. considering the company’s significant long-term growth prospects but currently weaker financial position with huge total debt of $22.03 billion against weaker total cash position of $8.32 billion only, restricting the company to make future growth investments. The profit margin of 52.81% is impressive. The PEG ratio of 5.73 indicate healthy company growth.